Finance Bill - Standing Committee B

[Sir Nicholas Winterton in the Chair]

Finance Bill

Nicholas Winterton: I welcome all members of the Committee to the sitting. I hope that they had a good, restful and fruitful weekend, part of which was beautiful in respect of the weather. We now return to the rigour of the third Finance Bill of 2005.

Dawn Primarolo: On a point of order, Sir Nicholas. I wish to clarify the Hansard record of our sitting last Thursday, which could be capable of a wider interpretation than I had intended. I fear that the problem is down to me, not the Hansard reporters. I stress that point. We were debating Opposition amendment No. 38 and controlled foreign companies. I referred to companies that have been unable to pass any of the exemptions under the controlled foreign company provisions and thus would be caught by the CFC legislation. I regret that, during what was quite a long day, the sentence
“In any case, there can be no justification for treating a CFC, which is by definition set up for tax avoidance purposes, more favourably than other companies”—[Official Report, Standing Committee B, 23 June 2005; c.141.]
potentially has a much wider interpretation.
I apologise to the Committee. I was not concentrating as much as I should have been on matters under discussion. I hope that the hon. Member for Runnymede and Weybridge (Mr. Hammond) will accept that that one tiny sentence does not fundamentally change a huge piece of legislation on controlled foreign companies. I am grateful to you, Sir Nicholas, for giving me the opportunity to put the record straight. I apologise to the Committee for my inadvertent slip.

Nicholas Winterton: I am sure that the Committee is grateful to the Paymaster General for her clarification.

Philip Hammond: Further to that point of order, Sir Nicholas. I am grateful to the Paymaster General for her clarification. It was a very long and hot sitting on Thursday. It was with admirable foresight that you managed to arrange matters so that you would not be in the Chair, Sir Nicholas. Due mainly to the weather, it was not the most pleasant sitting. It is important that, when discussing a Finance Bill in particular, everything that is said is precise, and if it is capable of misinterpretation, that it is clarified at a later stage.
People outside the Room have suggested that two other issues referred to on Thursday afternoon require clarification. In answer to my hon. Friend the Member for Braintree (Mr. Newmark) about Inland Revenue pre-clearance, the Paymaster General said:
“The clearance is binding. If a company has approached the Revenue and gone through the clearance procedure in place as a result of the provisions, and if the HMRC makes a decision, that decision is binding.”—[Official Report, Standing Committee B, 23 June 2005; c.104.]
Lawyers expressed surprise at the expression, “The clearance is binding.” I am told that the al-Fayed case found that an agreement between the Inland Revenue and the taxpayer did not have the force of law and was not capable of enforcement by the taxpayer. I take it that the Paymaster General’s comment was not intended to rewrite the law and imply that a pre-clearance decision was binding—

Nicholas Winterton: Order. I fully appreciate the hon. Gentleman’s argument, but we must not reopen that debate. I am permitting clarification of the report in Hansard. The Paymaster General was specific in her remarks, and that was extremely helpful. I hope that the hon. Gentleman can bring his point of order to a conclusion so that we can continue our debate on the Bill.

Philip Hammond: That is very helpful, Sir Nicholas. Perhaps I can make a suggestion. Clause 31 is the last clause in a chapter that deals with complex matters. The Paymaster General has heard my point of order. Perhaps it might be possible to tie up any loose ends in relation to the chapter in the stand part debate, to ensure that the record is clear.

Nicholas Winterton: The answer to that is most certainly yes.

Dawn Primarolo: Further to that point of order, Sir Nicholas. I cannot find the reference; it is not in column 140—[Interruption.] Sorry; it is column 104.
I was saying that the Revenue will consider itself bound by the decision. There is no question of inspection of the court case to which the hon. Gentleman refers. However, I am more than happy to write to every member of the Committee detailing how the Revenue will deal with applications from companies; how, having given its decision to those companies, the Revenue will consider itself bound by what it has said; and why that is perfectly in order with other decisions that have been taken in courts or elsewhere. That matter has been checked.

Nicholas Winterton: I am sure that the Committee is grateful to the Paymaster General, and that it will appreciate the letter that she says she will write.

Clause 31 - Commencement

Philip Hammond: I beg to move amendment No. 49, in clause 31, page 28, line 10, leave out ‘16th March 2005’ and insert ‘31st July 2005’.

Nicholas Winterton: With this it will be convenient to discuss the following amendments: No. 50, in clause 31, page 28, line 12, leave out ‘16th March 2005’ and insert ‘31st July 2005’.
No. 51, in clause 31, page 28, line 15, leave out ‘15th March 2005’ and insert ‘30th July 2005’.
No. 52, in clause 31, page 28, line 17, leave out ‘16th March 2005’ and insert ‘31st July 2005’.
No. 53, in clause 31, page 28, line 22, leave out ‘16th March 2005’ and insert ‘31st July 2005’.
No. 56, in clause 31, page 28, line 24, leave out subparagraph (a).
No. 54, in clause 31, page 28, line 24, leave out ‘16th March 2005’ and insert ‘31st July 2005’.
No. 55, in clause 31, page 28, line 26, leave out ‘31st August 2005’ and insert ‘31st December 2005’.

Philip Hammond: The clause deals with the commencement provisions for the chapter, which addresses the problem of avoidance through tax arbitrage. For things covered by the chapter, a tax charge is potentially accruing now, and has done from 16 March. However, the commencement clause creates opportunities for companies to unwind the arrangements that they have in place by 31 August. That date gives companies an unrealistically short period within which to comply.
When the Bill was first introduced, 31 August was some four and a half months after the date of introduction, but since then the chapter’s provisions have undergone a number of changes. Issues are still outstanding, and clarification is still being sought and received as we go forward. It would be inappropriate and potentially dangerous for companies to collapse structures to take advantage of the window that is deliberately being granted by the Government without knowing the final form of the legislation
I am sure that the Paymaster General will agree that it would pretty much be a disaster if a company underwent a complex restructuring exercise to take into account activities outside the scope of the arbitrage provisions only to find that they had fallen foul of the new rules because changes took place or because further amendments needed to be made. The essential proposal is to extend until the end of December the window of opportunity for things to be unravelled. Also, we want the commencement date of the accrual of liabilities to be changed to 31 July. I accept that that is an arbitrary date to select to replace 16 March. It is based on a comfortable view of when the legislation will achieve Royal Assent.
There are two issues to address. The first is to do with the requirement placed on companies. They should not incur liabilities while the situation is still in a state of flux and changes are being made to the legislation. The second is that companies must have an opportunity, from a standing start, to make the changes necessary to ensure that they can take advantage of the intended window of opportunity to unravel the arrangements.
Companies are telling us that the arrangements take time to unravel. Many of them will involve third party lenders and, for example, complex banking covenants.  They cannot be collapsed overnight. Financial terms will have to be negotiated, as will the legal documentation that will be necessary and the legal processes that will have to be carried out to give effect to the required changes. Last week, we spoke to one company that has decided for commercial reasons to unravel one of these structures. It took that decision before the Budget, but even now it is doubtful whether it can complete that by 31 August simply because of the time that it has taken to renegotiate the necessary arrangements. It is important to give effect to what the Government both intend in the legislation and made clear is their intention in subsequent explanations, so that we have a later starting date and a later closing of the window for cessation of schemes.
I hope that the Paymaster General takes that on board and that she reassures the Committee that if the Government are unable to accept the amendments they will, by whatever means—perhaps by extra-statutory concession—give companies a little longer than the 31 August cut-off date to take advantage of the cessation provisions in clause 31(3).

Dawn Primarolo: As the hon. Gentleman says, the clause deals with the commencement of the arbitrage rules in relation to both deduction and receipts cases. Provisions in any Finance Bill often take effect from the date of Royal Assent, thereby giving companies time to take them on board. However, in common with most anti-avoidance legislation, the relevant clauses have a Budget day start—in this case, 16 March 2005. The reasons for that are obvious; a Budget day start date removes the opportunity for companies to exploit any identified gap between the announcement and the commencement of the new rules. Allowing a gap between those dates could lead to additional loss of tax as, unfortunately, some companies might bring forward deductions or receipts so that they arise before the commencement date. These matters are always a challenge when considering anti-avoidance legislation, and it is difficult to strike the right balance.

Philip Hammond: The right hon. Lady makes a powerful point, and, perhaps, we have opened that window by suggesting 31 July as the date. Would her view be different if the amendment had suggested today as the commencement date?

Dawn Primarolo: No, it would not. There would still be a possibility of companies having schemes ready that could be demonstrated to have been enacted before the clear statement in the Budget on 16 March and the final decision being taken on a commencement date. We face a real challenge.
I want to answer the hon. Gentleman’s concerns and explain what the Government have done in taking the proposal forward. I think that he appreciates that we cannot allow a gap. Anti-avoidance legislation is specific and the technical notes and the statements have to be produced at the time that it becomes effective to deal with that matter. Amendment Nos. 49 to 54 would, unfortunately, create such a gap by moving the start dates. I appreciate the hon.  Gentleman’s point about complexity, but moving the start date from 16 March to 31 July would open up a significant opportunity because legislation, by virtue of stating where an avoidance opportunity will be closed, signposts where it is in the first place. It is a bit like taking out an advertisement. Why would any Government want to advertise how to avoid tax when they announce that they are to prevent such avoidance? That is why the start date is that of the Budget.
I recognise that the legislation was introduced in the first Finance Bill but subsequently dropped and that changes have been made to the guidance as a result of consultation in the interim. However, the hon. Gentleman’s argument overlooks a number of facts. First, the Government made it perfectly clear on Second Reading of the last Bill that the legislation would be reintroduced and that the original start date would be preserved—that was a clear statement made in Parliament. Secondly, the guidance has been amended to take on board the comments made by business. Thirdly, moving the commencement date to 31 July would give companies and their advisers an extra four and a half months of deductions under arbitrage avoidance schemes, which would increase the cost to the Exchequer. That runs counter to the Government’s objective, which is to establish a modern and competitive tax system that is also fair.
It is hard to see how giving avoidance schemes, in effect, a risk-free period in which to obtain a UK tax advantage and then unwind the scheme fits in with that objective. In addition, I have been informed that a number of companies—I think that I made reference to this in earlier debates—have already unwound their schemes to limit their exposure to the legislation. It would clearly be unfair to those companies then to move the goalposts and allow other companies to benefit from a later start date.
I know that the hon. Member for Runnymede and Weybridge considers this a serious matter. He needs to concentrate on the point that moving the start date to 31 July would give about five weeks from today for companies and their advisers to put in place short-lived schemes, which could produce huge deductions and major losses of corporation tax. The principle of a start date and a period to comply is standard and straightforward.
Amendments Nos. 55 and 56 would open up the transitional arrangements to the point where they will defer any impact of the provision until 2006. Before I go into detail, I shall say a little more about the transitional provisions that are in place. Clause 31(3) provides an exemption for schemes with unconnected parties that were in existence on 16 March, provided that they are wound up before 31 August 2005. The purpose of the exemption is to give companies that have entered into a transaction that constitute an arbitrage scheme with an unconnected party—typically, with an unrelated bank—the chance to unwind the transactions without triggering the legislation.
The exemption is restricted to transactions with unconnected parties, as it recognises that although transactions within the same group of companies can normally be unwound quickly, that process can take longer when third parties are involved. When the first Finance Bill was published, the transitional period lasted until 1 July 2005. As no statement was made on that specific point on Second Reading, the period has been extended to 31 August to take account of the election period and to give companies slightly longer to unwind their existing third party arrangements. Amendment No. 56 would remove the limitation to unconnected parties and amendment No. 55 would move the end of the exemption period from 31 August to 31 December. Together, the amendments would mean that all arbitrage schemes in existence on 16 March would be able to continue without penalty or challenge for another 10 and a half months.
We touched on this issue during our debates last week. Our proposals to close contrived avoidance schemes are a result of disclosures that have been made. I am sure that the hon. Gentleman understands that companies with existing schemes would have every incentive to bring forward and increase deductions under their schemes before the cut-off dates. I understand the point made by the hon. Gentleman: statements on the commencement date were made in Parliament. The moving of the transitional arrangements to take account of the election period is a reasonable step by the Government, but to accept the dates proposed in the amendments would leave the Exchequer unnecessarily open to potentially huge tax losses. I am not attracted to the hon. Gentleman’s amendments and cannot encourage my hon. Friends to support them.

Nicholas Winterton: To ease the consciences of those who have already taken off their jackets, I should say to Committee members wearing jackets that if they wish to take theirs off to make themselves more comfortable and conscious of everything that we are debating, I am happy that they should do so.

Philip Hammond: On a point of order, Sir Nicholas.

Nicholas Winterton: I am not sure whether there can be a point of order on that matter. However, I am happy to use my discretion and allow the hon. Gentleman to raise one.

Philip Hammond: May I suggest that you follow the example suggested by the Paymaster General? Those who have already sinned against the rule should not now be let off the hook by the rule being changed retrospectively.

Nicholas Winterton: I could take that as criticism of the Chairman, but I shall not. I am grateful to the hon. Gentleman for that suggestion.

Rob Marris: Thank you, Sir Nicholas, and thank you for your forbearance on sartorial matters.
I have two questions. First, will my right hon. Friend the Paymaster General say whether the changed guidance issued on 26 May, following the draft guidance issued on 16 March, was adverse to or favourable to arbitrageurs?
Secondly, the hon. Member for Runnymede and Weybridge has not moved an amendment on clause 31(4), which relates to the date for receipts cases. May I ask whether there is a particular reason for that, or is it merely an oversight, owing to the pressure of work?

Dawn Primarolo: I shall answer first. The guidance was changed following consultation with business to clarify the intent of the legislation and ensure that it operated as had been announced by the Government in all of the statements. In that sense, by clarifying exactly where the Government envisage the legislation will bite and where it will not, the guidance errs on the side of those engaged in arbitrage, but not avoidance schemes; it does not change the intent or the content of the legislation

Philip Hammond: To answer my half of the questions asked by the hon. Member for Wolverhampton, South-West (Rob Marris), it was not an oversight but a conscious decision to focus on the deductions case, which I said last Thursday was the more important area because it has offered greater scope for manipulation. However, he could make the case that, in the interest of symmetry, the proposal should apply across both parts of the Bill.
In drafting amendments economy is all; unless we expect the Paymaster General instantly to accept or recommend amendments, we focus on an issue simply to get a response. She has made a perfectly coherent response that is, from her standpoint, logical; the problem is that she is always looking at this matter from the point of view of the offender—the company that is avoiding tax through arbitrage arrangements. I suspect that some of the heat in our debates is generated by the fact that we have an obligation to consider things from the point of view of those who are caught by the changes to legislation, who are not wicked, manipulative scheming tax offenders but people who have arrangements that have been in place for a long time, or arrangements that have been used over a long period and are well understood and well known to the Revenue.
I am advised that notwithstanding what the Paymaster General said last week, the Revenue has not become aware of these arbitrage arrangements as a result of disclosures under the Finance Act 2004. Some specific examples of schemes may have been disclosed to the Revenue—I am sure that they have—but the type of instrument that we are discussing is a well-established financing structure of which Revenue officials have been aware for a long time. Now, however, something that has been characterised over a long period as routine and acceptable tax planning is now being re-characterised as unacceptable tax avoidance.
I do not deny the Government’s right, as matters evolve, continually to examine the boundary between tax planning, which is accepted as legitimate, and tax  avoidance, which is not. I am somewhat disappointed that, so far, we have not heard a clear recognition of the distinction between avoidance and planning. I am told that the long-standing and widely understood definition of tax avoidance refers to tax planning that is convoluted and has a legal form contrary to its substance. Those are its essential characteristics. In addition, avoidance includes transaction steps that have no commercial purpose other than the avoidance of tax.
Last Thursday, the Paymaster General mentioned her surprise that the Opposition were concerned about the impact on UK competitiveness of closing down some of these arrangements. Perhaps it will be helpful if I place clearly on the record that we support the systematic closing of avoidance opportunities, based on the definition that I have given. However, we also recognise that ordinary tax planning, whether or not the Government like it, is a normal and inoffensive part of business operations everywhere in the world.
We are discussing huge multinational corporations and complex hybrid structures, but let me make an analogy with personal taxation. Nobody suggests that somebody who every year carefully sells precisely the right amount of their modest personal shareholdings simply to use up their capital gains tax allowance, or somebody who every year invests right up to the limit of their tax-free individual savings account investment allowance, is engaged in tax avoidance. Of course they are not; they are engaged in proper tax planning.
The issue that we are addressing under clause 31 is what happens when the Government want to move something that has for a long time been acceptable tax planning into the category of being unacceptable tax avoidance. That is why we have dared to suggest a slightly more generous provision of time for arrangements to be shut down. I understand the Paymaster General’s reluctance to allow that to happen—we all understand the pressures that the Inland Revenue is under to raise the sums of cash that the Chancellor wants—but we feel that there is an issue in the way that these arrangements are being moved from one category to another. I hope that the Paymaster General now at least understands why we have put forward these proposals.

Brooks Newmark: Would it not be helpful if the Paymaster General explained one point? My hon. Friend has continually highlighted the fact that tax is a key factor in decisions on where to invest. Given that fact and given the general shift among other countries toward lowering their taxes, it would be interesting to know whether the Paymaster General has done any analysis to discover the impact of the legislation in terms of reducing investment in this country.

Philip Hammond: My hon. Friend is right. That is our underlying theme throughout our consideration of the Bill.
I was a little disappointed that in last Thursday’s sitting the Paymaster General attempted to suggest that our argument made us the friend of the tax-avoider. That is certainly not our intention. I am also disappointed that she queried the relevance of a benign tax environment to international competitiveness.
I accept that there are difficult questions at the margin, but it is at the margin that our debates should be conducted. We will maintain our view that although the raising of revenue for the funding of public services is a critical activity of Government, it is ultimately self-defeating if doing so throttles the goose that lays the golden eggs by dissuading potential inward business investment and ultimately making the United Kingdom a poorer nation and reducing the Exchequer’s revenue flows.
In my opening remarks, I inadvertently did not speak specifically to amendments Nos. 55 and 56, but the Paymaster General has responded to those amendments none the less. Those amendments would remove the restriction for the escape clause, as I shall call it, which applies where arrangements are not at arm’s length. A number of people in the City are puzzled by that distinction. In relation to allowing companies with hybrid arrangements within group to unwind those arrangements and take advantage of the opportunity set out in clause 31(3), has the Paymaster General identified any danger that those companies could exploit the opportunity in a way that she considers to be further tax avoidance?
Word is getting back to us that that things are not as the Paymaster General described. She appeared to suggest that the approach was purely one of pragmatism, and that it was not so much a matter of denying the concession to companies with in-house arrangements as one of extending the period for companies with third party arrangements, on the basis that they would have to renegotiate those arrangements. I put it to the Minister that the practical experience is that even arrangements within group may still take time to unwind and to renegotiate. We must bear in mind that the new arrangements have to satisfy all the other anti-avoidance tests that are already in tax law. They have to be priced at arm’s length, and comply with the panoply of legislation already in place.
Outside the Treasury, it does not seem to be the view that companies involved in these relationships with external banks can necessarily collapse the arrangements without unintended or unfortunate—for them—consequences resulting from having to do things in that way. I do not know whether the Paymaster General will respond to that point. I was expecting her to say that there was a positive reason why that kind of arbitrageur could not be given more time. She appeared to say only that there was no positive reason why they should be given more time; however, that is not what we are hearing in the field.
I do not know whether the Paymaster General intends to speak again; it would be helpful to have an indication of whether she will. There being no  indication—[Interruption.] Having more or less concluded my remarks, my intention was to beg leave to withdraw the amendments, in which case she would be unable to speak on them again. However, I see that the right hon. Lady wishes to speak and I am happy to give way to her.

Dawn Primarolo: Good spot! It was good of the hon. Gentleman to make sure that I responded briefly to his points. On the question of—

Nicholas Winterton: Order. Is this an intervention?

Dawn Primarolo: It is an intervention to clarify the two points that the hon. Gentleman asked me to clarify. I shall do so briefly by speaking fast.
First, on the arrangements within group and for unwinding, those involved do not have to unwind; they simply have to make a disclaimer. That shows that we, too, recognise the challenges. Secondly, I come back to the fundamental point that I have made all the way through our discussions: where an arrangement involving arbitrage is set up for wholly commercial non-tax purposes, it will not be affected by the legislation.
The Bill is targeted at contrived avoidance schemes, so a balance has to be struck on the start dates and transitional periods. I think that the balance in the clause is fair. When we get to clause 37 and schedule 6, we can come back to that principal point, just to show how difficult it is for any Government, including the present one, to strike that balance.

Philip Hammond: I accept the Paymaster General’s assurance that the legislation is targeted at convoluted artificial arrangements; no one is suggesting that the Treasury set out to catch anything other than convoluted artificial arrangements. This Committee’s job is to ensure that the legislation does not inadvertently catch much more than that. The truth, as the Paymaster General has implicitly acknowledged, is that the original Bill would have done much more. The changes that were made to the Bill before its reintroduction are welcome in that they tighten the application. However, as she knows, concerns remain.
What the Paymaster General has just said, which was useful, is that no transaction that has a commercial purpose will be caught by the provisions; they will catch only artificially constructed transactions. I seek your indulgence, Sir Nicholas, to follow up that specific point. As we come to the end of this long, complex chapter, one question that was raised is still outstanding, although other questions might or might not have been answered.
 The Paymaster General asked me last week to go away and read the record. She told me that I would see that she had answered all my questions. I have read the record and I have sent it to bodies outside this House and asked them to read it. Others are engaged in this work, not just myself. We are still not clear that the question has been answered. If an arrangement is the subject of a notice requiring a company to recompute its deduction for interest, is it the case that the comparator that it must use in order to identify the UK tax advantage that it has gained, and thus the amount  of deduction that it has to disallow itself in order to eliminate the UK tax advantage under clause 25, is based on a comparison with what would have been the situation in the absence of the hybrid structure? If that is the case, would the company in the example that I gave last Thursday, which described a transaction that simply would not have gone ahead in the absence of the hybrid structure because the rate of return post-tax would have been so low that it could not be funded with plain vanilla bank debt that did not go through a hybrid structure, have to disallow itself the whole of its interest deduction on the ground that if the hybrid structure had not been in place, the loan would not have been made at all and therefore no interest would have been deducted?
To people who are following the debate about the Bill, that it would have to do so seems the inevitable logical conclusion. The provision there creates an entirely illogical and inequitable solution, because if the loan had not been made, the investment would not have been made, no revenues would have been generated and no tax would have been paid anyway. We are talking about a situation where an investment has gone ahead, tax has been paid on the income generated and the investor seeks, at operating company level, a deduction for the interest charged. Surely it cannot be the case that all that interest should be disallowed on the grounds that, had the hybrid structure not existed, the loan would not have been made because it would not have met the test of commercial viability that the investor had to apply?
I have looked at the record carefully and that seems to be the one major question that remains outstanding. I will not detain the Committee on this point, but there is another minor question: why on earth are the amounts chargeable under the provision being charged to case VI of schedule D? The Paymaster General says, “Because that is where they fit,” but the wide view of tax experts outside the House is that they do not fit in case VI of schedule D at all. However, that issue is not of burning importance, whereas the question I have just asked is significant and requires clarification.

Dawn Primarolo: I am not at all surprised that those outside the House who do not support these mechanisms—there are some, as there are others who support it—are seeking to get the hon. Gentleman to ask me, as Minister, to give a tax ruling on particular elements of a scheme that could be designed for contrived avoidance within the arbitrage arrangements. As he put that point repeatedly to me, I answer it on the same basis.
First, I am not being drawn into giving tax advice on the record as a Minister. Secondly, as I have made clear repeatedly through my comments, arbitrage cases will be decided on their own facts and circumstances. The Government have put the mechanism in place to enable companies to seek informal clearance from the Revenue.

Philip Hammond: Although that point is clear and came over more clearly than it did in the heat of Thursday afternoon—I understand exactly the position that the Paymaster General is taking—unfortunately, it still leaves us with a lack of certainty at the centre of the arrangements. There is still the potential that companies with innocent arrangements—those that were not set up with no commercial purpose, but were standard commercially structured arrangements—will be caught and have to go through a clearance procedure that would be simply a hassle for new schemes, but could be a disaster for them.
Without wanting to go round in circles, I hope that the Paymaster General will understand why we keep coming back to this issue. She is anxious to ensure that every loophole is closed and we are anxious to ensure that unintended consequences do not arise, either by catching people whom the Government do not intend to catch, or by creating a climate of uncertainty that will damage the United Kingdom as an investment location. That is a legitimate issue for Opposition Members to pursue.
The Paymaster General has now placed on the record her position on both those matters and those outside the House will be able to hear what she has said. If, in due course, we feel that we need to ask further questions, we will find an opportunity to do so.
I am grateful to the Paymaster General and I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 31 ordered to stand part of the Bill.

Clause 32 - Temporary non-residents

Question proposed, That the clause stand part of the Bill.

John Healey: This is the first of a series of clauses dealing with capital gains tax and common avoidance schemes.
In 1998 the Government introduced legislation to counter the widespread use of certain tax avoidance schemes that relied on the fact that in most circumstances the rules for capital gains tax did not generally impose a charge on people who had been non-UK resident for the entire tax year in which they disclosed financial information. Under the rule that was introduced in 1998 the gains of people who leave the UK temporarily are taxed; it applies only if they had a close connection with the UK before they left and they are absent for fewer than five complete tax years. However, some people took advantage of the interaction between the terms of some of our tax treaties and the capital gains tax rules in such a way that they could return to the United Kingdom before the stipulated five years had elapsed without having to pay any UK tax from gains realised while they were resident outside the UK.
The measure in clause 32 removes this avoidance opportunity. It stops the exploitation of our double taxation treaties and ensures that a charge to capital gains tax is imposed when the individual’s absence from the UK is of a temporary nature. It does that by ensuring that the tax treaties cannot have the effect of preventing the UK’s rules that were introduced in 1998 from applying.
The measure also deals with a situation in which the individual is regarded as resident in a foreign territory for tax treaty purposes, while simultaneously being resident in the UK. In such cases, the 1998 legislation will have no effect as the individual concerned will not have ceased to be resident in the UK. In certain circumstances, therefore, treaty non-residents could also be exploited by tax planners to enable people to avoid tax on capital gains; this measure closes that opportunity.
The Government are introducing the measure to put beyond doubt the question whether the terms of our tax treaties prevent the application of the 1998 temporary non-residence anti-avoidance rules. Her Majesty’s Revenue and Customs has changed its view on that. It no longer accepts that our tax treaties have that effect, but to avoid uncertainty it seems sensible, wise and reasonable for us to legislate in clause 32 so that everyone is clear and individuals cannot seek to avoid capital gains tax in that way. The effect of this measure is to ensure that an appropriate amount of tax is charged in respect of gains made while individuals are temporarily absent from the UK. Whenever foreign tax has been paid, the double taxation relief will be available in line with the normal rules.
Reaction to this clause has been relatively muted since we announced it in the Budget and published it in the first Finance Bill. Deloitte’s, for instance, has said:
“The measures proposed are an example of the closure of a specific tax avoidance idea which had been widely used to avoid capital gains tax by emigrating to certain treaty friendly jurisdictions”.
In tax-planning and advisory circles, that has become widely known and promoted as “the Belgian wheeze”.
The measure in clause 32 is targeted at avoidance—the avoidance that we are seeing. I suggest to the Committee that the measure is proportionate and fair, and I commend the clause to the Committee.

Richard Spring: As we have heard from the Minister, clause 32 removes a loophole so that temporary non-residents cannot avoid UK capital gains tax by becoming treaty non-residents. Essentially, that is a legitimate response to an exploitation of treaties drafted before section 10A of the Taxation of Chargeable Gains Act 1992 came into force in 1998.
Although we accept the underlying force and rationale of the clause, we need to explore two important elements. The first is the jurisprudence of the European Court of Justice and the impact of the possible implications of EU law on our tax laws.  Obviously, that is a huge issue and a thread that will underlie many of our considerations during the passage of the Bill.
The second point was made by my hon. Friend the Member for Braintree, and I absolutely agree with him. We live in an era of tax differentials, which are growing ever larger not only internationally but within the European Union, where there are substantial tax reductions at all sorts of levels in some of the member nations, while our tax structures remain somewhat ossified.
I should like to bring the Committee’s attention to the European Court of Justice case of Hughes de Lasteyrie du Saillant v. Ministere de l’Economie, des Finances et de l’Industrie. The Advocate General suggested that authorities could provide for taxation of taxpayers returning after a relatively short period of non-residence. There seems to be an indication in the Hughes de Lasteyrie case that the five-year period in section 10A of the Taxation of Chargeable Gains Act 1992 may not be construed as a relatively short period for that purpose. It would mean that the legislation was contrary to European Union law. The Hughes de Lasteyrie case involved a Frenchman who changed his tax residence to Belgium. France charges an exit tax on individuals who do so, being primarily a deemed disposal at market value of assets that they hold at the time. Monsieur de Lasteyrie successfully argued at the European Court of Justice that such a measure discriminated against his moving to another member state of the European Union and was hence contrary to the freedom of establishment and freedom of capital articles of the EU treaty. That will therefore impact on the existing equivalent measures under United Kingdom tax law, including clause 32.
We need to be satisfied that the five-year period under section 10A of the 1992 Act is in line with the Advocate General’s comments. There is, however, an acknowledged balance to be struck in that the aim of section 10A is to stop people briefly going non-resident for tax avoidance purposes, as the Financial Secretary has said, and a potential opening of the door to the sort of avoidance that section 10A was designed to stop. The Government genuinely need to satisfy themselves that we have proper, robust support that is safe from unexpected attack under EU rules.

Rob Marris: I hope that the hon. Gentleman will forgive me if I was not following his argument closely enough, but was the Hughes de Lasteyrie case a decision of the European Court of Justice or did the Advocate General’s opinion inform the court?

Richard Spring: The Advocate General made such a decision and the state of the matter in terms of its implication is still to be established. I hope that the hon. Gentleman will agree—I mean this dispassionately—that we have to deal with the potency of EU jurisprudence in our national law and our raising such an issue now is of huge importance.
Under EU law, anti-avoidance legislation must be specific and not aimed generally at all situations. It could be said that clause 32 catches all situations, including when the intention was not to avoid tax. It  might, for example, catch a worker who moved to an EU country for up to five years to undertake employment in that country with no intention to avoid tax. A provision that interferes with one of the fundamental freedoms can be justified by a member state on the grounds that its aim is to tackle the avoidance of tax as long as it is sufficiently targeted. A rule such as section 10A seems to deem all emigration to be tax motivated, which, if considered too broadly targeted, opens it up to EU law attack. We must be sure that the Government are robust and clear about the impact of clause 32, in view of the jurisprudence and potential actions of the European Court of Justice.

Christopher Huhne: I should like to ask the Financial Secretary a question because I am informed that another potential implication of the clause raises the issue of whether domestic legislation can override a tax treaty signed with another country. I gather that that is aimed particularly at residents moving to Belgium and availing themselves of the double taxation provisions under the treaty with that country. It would be interesting to hear the Minister’s comments on the status of domestic legislation.

John Healey: I am grateful to the hon. Member for West Suffolk (Mr. Spring) for his description of the clause as a legitimate response to tax avoidance. He asked reasonable questions, and raised a concern—as did the hon. Member for Runnymede and Weybridge on Second Reading—about whether the measure could fall foul of European law. We are confident that it is compatible with our EU obligations and Community law.
The hon. Member for West Suffolk dwelt at length on the French case. I shall add a couple of points of explanation that may help make the point and draw the distinction between the French case and the provisions in clause 32. The hon. Gentleman is right that Community law prohibits a member state from imposing any unjustified restriction on the exercise of Community rights—such as, in this case, the right to free movement in the European Union. In March 2004, the French case that the hon. Gentleman cited imposed a tax charge on unrealised capital gains at the point when people depart from France to become resident in another member state. It was not the Advocate General but the European Court of Justice that held that that rule was incompatible with Community law. It may be helpful if I quote from the ECJ judgment. It stated that
“the French authorities could, for example, provide for the taxation of taxpayers returning to France after realising their increases in value during a relatively brief stay in another Member State.”
That is precisely what we propose to do under this measure. When leaving the UK, the tax position of an individual is neither improved nor impaired as a consequence of their move from the UK. Such a tax-neutral rule means that there is no restriction on either free movement or free establishment. In other words, our temporary non-residence provision is not an exit charge, so there should be no question of its falling foul  of Community law. Indeed, we take considerable care to avoid such situations arising when we frame our domestic legislation.
The hon. Member for Eastleigh (Chris Huhne) asked whether this provision was a treaty override. The provision’s purpose is to close down an aggressive tax avoidance scheme that seeks to exploit the treaties that we have in place. Those treaties are designed to avoid double taxation; they are not designed to provide for non-taxation, which is the practical effect of the current situation. I think that the hon. Gentleman will accept that when tax treaties are abused in this way there is a danger of their being brought into disrepute. This measure will not lead to our infringing the taxing rights of any country with which we have taxation treaties, and, as I have said, the double taxation relief will be available to any taxpayer on whom the other country has imposed a charge. Furthermore, under this provision we will be taxing only UK residents.
This provision is not a treaty override, but it is intended to ensure that the treaties work as intended, and if there is any question of taxation in another country where a double taxation treaty is in place, the normal rules ensuring that that taxpayer gains relief in our country on any UK tax charge will come into play. On that basis, I hope that the hon. Members for Eastleigh and for West Suffolk will accept that this is an important measure, and that the Committee will agree.

Richard Spring: I am grateful for the Financial Secretary’s comforting remarks. However, I shall simply point out that it was subsequent to the ECJ case that the Advocate General made his comment, which suggested that authorities could provide for taxation of taxpayers returning after a relatively short period of non-residence. With regard to the comfort that he has given, I say in a wholly dispassionate way to the Financial Secretary that I hope that our ability to frame our domestic anti-avoidance legislation will not be impaired. I ask him to monitor carefully the procedures that may be used in the European Court of Justice, and to ensure that our legislation means that we have control of the national level and that that is not impaired for reasons outside our control.

Question put and agreed to.

Clause 32 ordered to stand part of the Bill.

Clause 33 - Trustees both resident and non-resident in a year of assessment

Question proposed, That the clause stand part of the Bill.

John Healey: The clause introduces an anti-avoidance measure to counter certain tax avoidance schemes that, in tax planning circles, are commonly known as sunset schemes. They have been used by some trustees and settlers of settlements to exploit the gap in our capital gains tax rules that allows trustees to avoid capital gains tax by arranging their affairs so  that they are both resident and non-resident in the UK in any given tax year. Under the existing rules only gains arising to trustees if they are resident in the UK throughout the year or are non-resident throughout the year are taxed
The schemes take various forms but the common feature is that they exploit the terms of our tax treaties to ensure that no UK tax is chargeable on gains that would otherwise be taxable in the UK and little or no tax is payable on the gains elsewhere. The schemes rely on the broad proposition that at any given moment trustees are resident for capital gains tax purposes in the country where the majority of the trustees reside. It is usually a straightforward matter for trustees resident in one country to be replaced by trustees resident in another. That can be done quite straightforwardly on paper, and that, of course, makes residence for trust taxation purposes highly mobile.
In the simplest case, we start with a long-established settlement with trustees resident in a tax haven. Those arranging the tax avoidance have the trustees replaced by trustees resident in another foreign country with little or no tax on capital gains and a treaty with the UK that gives the foreign country sole taxing rights in respect of any gains. While resident in that country, the trustees realise the gains. Finally, the trustees are replaced by a further set of trustees resident in the UK for the rest of the tax year in which the gains are realised. The result of the interaction of the tax treaty and the existing tax rules means that the UK cannot tax the gains, so they are realised free of UK tax and, in many cases, free of any tax whatever.
As a Government, we have sought to negotiate protocols with our tax treaty partners to counter these schemes but with over 100 separate treaties, it is a slow process, as the Committee will appreciate. Also, as soon as we prevent schemes from making use of one country by amending the relevant treaty, the tax avoiders move on to another country. In other words, we are chasing avoidance around the world and never quite catching up with it, and all the while the tax avoiders are costing the UK Exchequer lost revenue. That is unacceptable and unfair to those who do not avoid the tax due to them.
The clause ensures that the avoidance device cannot work in respect of disposals made by trustees on or after Budget day. It does so by ensuring that if residence changes during the tax year the terms of our tax treaties do not interfere with our right to tax gains under our existing domestic legislation. It does not affect the foreign country’s right to tax that gain, and established mechanisms are in place to prevent double taxation of the trustees in a similar way to that which we discussed when the hon. Member for Eastleigh questioned me on clause 32.
The clause puts a stop to some highly artificial and tax-motivated avoidance schemes and I commend it to the Committee.

Richard Spring: As we have heard, the clause prevents the UK from breaching any taxation treaties and ensures that in innocent cases, where there is a tax  charge overseas, that can be credited against the UK tax bill arising on the same disposal. Hence the Bill seeks to prevent the rules from causing a tax penalty to arise when such a disposal is made in normal commercial circumstances.
The Government are right to highlight any possible abuse of so-called sunset schemes, but it has become general practice for anti-avoidance legislation to be introduced without prior notice. It is perhaps not surprising that the Bill contains clause 33 to counter a perceived mischief, whereby trustees change residence in order to obtain a tax advantage. It appears to be part of a general movement against what the Revenue considers to be a manipulation of residence. However, it is surprising that legislation has been introduced while the question of trust residence is still under debate. As is often the case, the measure appears to assume that all international movement takes place purely for tax reasons; it might therefore penalise trusts that make genuine disposals during a period of non-residence.
The prior notice point is still valid in that although we knew from the first Finance Bill of 2005 that the clause was likely to be included post-election, the effective date for the legislation remains at 16 March, so there was effectively no notice period for the change. The point about the outstanding issue of trust residence is also still valid, as draft legislation is not expected until spring 2006. We need clear reassurance that this anti-avoidance legislation, which we support in principle, will not catch innocent changes of residence. That point was made to us by outside, interested organisations and bodies. As a general point, we have been informed that the moving target of trust legislation under the modernisation review is making life extremely difficult for trustees, especially those who have primary interests in the interests of that trust.

Rob Marris: I struggle with some of these issues, but I want to ask my hon. Friend the Financial Secretary a question. Given the complications of these cases, would it not be simpler to reintroduce capital transfer tax?

John Healey: Perhaps I can take my hon. Friend’s point as an early Budget representation and leave it at that.
The hon. Member for West Suffolk pointed out—and, I think, accepted—that for many moves to counter tax avoidance it does not make sense to offer prior notice. The clause does not contain what I would regard as retrospective legislation. It takes effect from the Budget date on which it was announced. How it would work was clearly spelt out at that time in a Budget notice. We published the draft legislation in the first Finance Bill and prior to the election we made it clear that if we were re-elected, we would reintroduce the provision. We have done that.
The hon. Gentleman is concerned about trustees who might be caught, as he put it, for “innocent” actions. That follows on from what I have just said; the measure will apply only to disposals made by trustees on or after 16 March, which was Budget day. We have  made our intention to proceed with the legislation clear. Therefore, trustees were in a position to know the potential effect of the measure if they changed residence after Budget day. I am sure that they accept, and take seriously, their responsibility to consider carefully any effects of their actions on the beneficiaries.
Although the hon. Gentleman was not very direct about it, I think that he referred to the general review of residence and domicile provision. Once again, we made that matter quite clear in the Budget. We are continuing that review and continuing to review the rules as they affect the taxation of individuals. We are keen to proceed on the basis of evidence and we will do so. We welcome further contributions to that process, including those from the sort of trustees with whom he might have been in contact. We plan to take the process forward with the publication of a consultation setting out the possible approaches for reform.
In the meantime, the measure does not pre-empt that review and it has provoked an interesting reaction from some of the specialists in the field. BDO Stoy Hayward remarked:
“These measures do not come as a surprise given that over the past couple of years the authorities have sought to renegotiate some relevant DTAs to give the UK taxing rights on gains.”
I have explained why that approach was too slow and allowed, in the meantime, those who were keen to continue their tax avoidance to switch their attentions to other countries. On that basis, I hope that the Committee accepts the clause.

Richard Spring: I am grateful for the Minister’s explanation. We will wish to make a contribution to the review. I suggest that if he wants to get some excellent personal feedback and experience on trusts and their efficacy and ability—particularly offshore trusts—to help him reduce tax bills, he might wish to consult his noble Friend Lord Drayson, a Minister who appears to be expert beyond parallel in these matters.

Question put and agreed to.

Clause 33 ordered to stand part of the Bill.

Clause 34 - Location of assets etc

Question proposed, That the clause stand part of the Bill.

John Healey: The clause brings into effect schedule 4. The clause and schedule together introduce a further anti-avoidance measure relating to capital gains tax by providing additional rules to determine where assets are situated for the purposes of tax on capital gains.
In most circumstances UK taxpayers are liable to tax on their capital gains regardless of where the asset in question is situated, but if individuals who live in the UK are domiciled abroad, their gains on disposals of assets situated outside the UK are liable to capital gains tax only if they remit the disposal proceeds to the  UK. People who are resident abroad but carry on a business in this country are liable to tax on capital gains only in respect of disposals of business assets that are situated in the UK. The current tax rules for determining where assets are situated do not cover every circumstance. Where there is no specific rule in the tax code, the provisions and principles of common law apply to determine the situation of an asset. People have exploited some gaps in the tax rules to avoid tax on gains arising from the sale of assets abroad.

Nicholas Winterton: Order. The Minister appears to be trespassing into the schedule as well as the clause. If he intends to do that, I am inclined to have the schedule taken formally when we come to discuss it. I hope that the Committee accepts that. I am happy that he should talk to the schedule, if he wishes.

John Healey: I am grateful for your guidance, Sir Nicholas. I thought it sensible to combine the two matters, given that the clause simply gives effect to schedule 4 and given the substance at stake.
I was explaining how the avoidance practices mean that the taxes avoided on assets ought, in any reasonable view, to be regarded as UK assets and should attract a UK tax charge. The measure stops exploitation in two ways. First, shares in companies incorporated in the UK will generally be regarded as situated here. Secondly, unless an existing tax rule already specifies their location, intangible assets, such as options or rights over other assets, will now be treated as being situated in the UK for the purposes of tax and capital gains if they are subject to UK law at the time that they are created. The rules for futures and options that are not subject to UK law at the time they are created will take account of the location of the underlying subject matter.
The measure is designed to frustrate the schemes arising on the disposal of assets related to the UK outside the scope of UK tax on capital gains. It does not deal with assets that are unrelated to the UK—for example, shares in an overseas incorporated company that are registered abroad as UK assets—and it strikes a fair balance as it closes a lucrative avoidance scheme. I trust and hope that the Committee will accept it.

Richard Spring: I am grateful to the Minister for his explanation. The measure is perfectly legitimate and sensible, and we are happy to support it.

Mark Field: I accept that the measure is a sensible decision. However—I do not expect the Minister to go into any great detail on this—I hope that the Treasury is entirely aware of the situation in what is clearly and inevitably a fast-moving world. In particular, a large number of transactions take place over the internet and it is sometimes difficult to gauge the companies involved in such transactions and the legal rights of customers and companies.
It strikes me that we are talking about an area in which a great deal of detailed academic thinking will have to come into play, probably in the very near future but certainly within the next decade or two, if we are to ensure that there is a proper tax regime and that  sufficient proceeds are coming through to the Treasury. My question is not what specifically is being done, but whether, in a more general sense, thought is going into the increasing amount of trade taking place over the internet. That might have an impact on a range of taxes—initially, obviously, sales tax, but potentially capital gains tax, too.
I represent the west end of London, where a number of our retailers have some woeful stories. I suspect that the problem is not only the congestion charge, but the fact that, increasingly, a great amount of their money is taken away because of the number of transactions and sales that take place over the internet. Is there some blue skies long-term thinking going on in the Treasury about the future nature of taxation and the taxation burden, especially for capital gains tax? We live in a world where the obvious boundaries of nation states are becoming far more blurred as far as such transactions are concerned, and I hope that something new is being done. I guess that any new measure will be supranational, involving the EU countries and, increasingly, the United States—which, as ever, is likely to be one step ahead of the game—to make sure that we close any loopholes before they become apparent to highly paid tax advisers.

Christopher Huhne: Over many years, I have listened to interesting discussions between the Treasury and various non-UK domiciled communities in the UK. Periodically, the Chancellor of the Exchequer tries to clarify the situation and hears representations to the effect that doing so would lead to a substantial exodus from the UK. I gather that the provisions are mainly aimed at that non-UK domiciled but UK-resident community. In the Minister’s view, is the potential use of bearer shares in UK companies likely to be significant enough to precipitate such a move? We are dealing with a sanctified tax avoidance measure—that is, the use of non-domicile status—that has been on the UK statute book for many years. The Government are clarifying a rather small element of it, but is the Minister certain that the provision will not lead to a substantial group of people leaving the UK for other jurisdictions?

John Healey: The hon. Member for Cities of London and Westminster (Mr. Field) made a number of telling points. As he said, we are indeed talking about a very fast-moving world and, as he would expect, we are giving careful thought to the sort of issues that he raised. It would not be responsible for the Treasury or Her Majesty’s Revenue and Customs to do otherwise. So I can in general terms give him some assurance on that. He is right to suggest that the provision is a targeted approach to a specific avoidance problem. In a sense, that addresses the concerns of the hon. Member for Eastleigh. The fears that he expressed are unlikely to arise because the provision is targeted.
We have targeted the provision in schedule 4 and clause 34 on the schemes that are promoted most commonly and aggressively, and that cost the  Exchequer the most. With this set of provisions, we are not trying to craft a total solution to the general range of avoidance activities in relation to capital gains tax. To do so would clearly be complex, comprehensive and involve a huge amount of lengthy legislation, and that is not our purpose. Our purpose is to close down this sort of common and commonly promoted tax avoidance scheme.
One of the top 20 accountancy firms, the Tenon Group, caught the purpose very well when it commented:
“These changes will severely restrict the ability of non-domiciled individuals to avoid Capital Gains Tax on what are, in economic terms, UK assets.”
That goes to the heart of the matter: this is an avoidance scheme that avoids the tax charge on what, in any reasonable view, are UK economic assets. The purpose of the clause and the schedule is to change that.

Christopher Huhne: I understand the purpose of the clause, and the Financial Secretary will be aware of the history of representations made, in particular, by the Greek shipowning community in London over many years and the various little pas de deux that have gone on between that community and the Treasury. What I asked was whether he thought that the provision was likely to lead to the exodus of any particular parties who might decide that, for the purposes of taking gains on UK assets, they would prefer to be resident in Piraeus rather than London.

John Healey: The short answer to that is that we shall see. We do not expect the impact to be significant, but overriding everything is our principal purpose of closing down a tax avoidance scheme that is not legitimate and that allows taxpayers who ought to be subject to a UK capital gains tax charge on assets to avoid that charge. On that basis, we believe that this is a reasonable measure that strikes the right balance between the factors that we have had to take into account.

Question put and agreed to.

Clause 34 ordered to stand part of the Bill.

Schedule 4 agreed to.

Clause 35 - Exercise of options etc

Question proposed, That the clause stand part of the Bill.

John Healey: I seek your guidance, Sir Nicholas. The clause refers to schedule 5. Do you wish schedule 5 to be discussed now, or do you wish to have a specific debate on that schedule?

Nicholas Winterton: I am in the hands of the Committee. What I do not want is for two debates to take place, one of which is a repetition of the other. If the Financial Secretary wishes to have a debate on clause 35 and the appropriate schedule, then so be it if that is also the wish of the Committee. [Interruption.] I have  heard quietly the Committee’s view, and if its members wish to speak to schedule 5 during the debate on clause 35, I am happy for that to happen. However, I will then put the question on schedule 5 formally without debate.

John Healey: I felt that I needed to be sure of my ground before offering the Committee a brief introduction to clause 35 and schedule 5, which I am happy to do.
The clause and the schedule introduce another anti-avoidance measure and correct a defect in the capital gains tax rules for assets that are bought or sold under options contracts. That loophole has been exploited to avoid tax, and we announced our intention to close it in the pre-Budget report of 2 December 2004. The defect in the rules might have allowed people to avoid tax on capital gains by using options to dispose of assets at uncommercial prices. For example, someone might want to transfer an asset worth £1 million to their family trust. If they transferred it directly to the trust, they would be taxed by reference to the value of the asset—£1 million. Instead, they could use an option that set the sale price at, say, £1,000. They would then be taxed by reference to the uncommercial option price of £1,000 and not on the true £1 million value of the asset. Using the option in that way would enable them to give away an asset effectively tax-free.
Companies could enter into similar option deals—for instance, they could transfer an asset at an uncommercially low option price to an overseas company in the same worldwide group of companies, because the asset would remain in the economic control of the group as a whole. The group would incur no economic loss.
People might also have been able to use options to buy an asset at an uncommercially high price from, for example, their offshore trust. The trustees would not be liable to capital gains tax because the trust would be offshore. The person who bought the assets from the trustees could sell them and create an artificial tax loss because of the unrealistically high price that they had paid. That, of course, would be used to compute the gain or loss arising on that sale.
Alternatively, if that person disposed of the asset after its value had increased, the full increase in value would not be taxed because the gain on the disposal would be computed using the artificially high price paid. The proposed measure puts such cases back on the correct footing.

Philip Hammond: I have not spent any time studying this part of the Bill, but is not the example of an asset purchase at an artificially high price already covered by existing transfer pricing legislation? Would such legislation not effectively eliminate, or capture the tax gain from, any advantage derived from that?

John Healey: If it did, we would not need to introduce the clause. In the context of the operation of the capital gains tax rules, the transfer pricing mechanism does not cover the problem. Under these measures, the tax liability will be based on the value of  the asset bought or sold, instead of on the uncommercial option price. The same position applies for assets given away or sold at an uncommercial price without using an option.
The measures are targeted at people who use that device to avoid tax. Companies and individuals who exercise options at arm’s length on normal commercial terms will not be affected and will face no additional compliance burden. Employees who participate in approved company share option plans will also be unaffected.

Richard Spring: As we heard from the Minister, the provisions are anti-avoidance in nature and block a loophole caused by amending legislation passed in the Finance Act 2003. My hon. Friend the Member for Runnymede and Weybridge was right to raise his point, and I hope that the Minister was correct in his assertion.
The blocking mechanisms are fairly well targeted, if not extremely lengthy and comprehensive, to say the least. We are willing to accept them, but with a qualification about competence. Why are the Government having to amend something passed as recently as 2003? Is it because they introduced a tax avoidance structure rather than closed one down? This is all part of the culture of hideous micro-management, which is a characteristic of the taxation legislation of the Government.

Question put and agreed to.

Clause 35 ordered to stand part of the Bill.

Schedule 5 agreed to.

Clause 36 - Notional transfers within a group

Question proposed, That the clause stand part of the Bill.

Richard Spring: The clause tidies up existing legislation so that an existing relieving provision can be used by UK branches of overseas companies with capital losses. The context is the rules for offsetting capital gains and capital losses within a group of companies. There is no group relief as such for capital losses. Group relief gives scope for offsetting losses and profits only on trading losses, management expenses and so on. To offset capital losses, which in any case can only be offset against capital gains, traditionally the asset being disposed of had to be transferred to another group member so that the losses and profits could be realised within the same company. However, the Finance Act 2000 inserted what is now section 171A of the Taxation of Chargeable Gains Act 1992, which allows that transfer to happen notionally. Companies can elect for the transfer to be deemed to have happened and thus the capital loss and capital gain are suitably matched.
Clause 36 extends section 171A. It covers a branch situation and thus allows a notional transfer in a situation in which A and B are both 100 per cent. subsidiaries of C, B has a branch in the UK, A is about  to dispose of an asset which will produce a chargeable capital gain, and B has capital losses in its UK branch. The provision in the clause will mean that A and B can make an election, deeming A’s asset to be used in B’s UK activities. While that is sensible, it once again begs the question of why group relief cannot simply be extended to capital losses, restricted to offset against capital gains in other group companies if necessary.
I have one further point. A number of other countries permit such a use of capital losses—for example, Belgium, Norway, Spain, Italy, Switzerland, Greece, Austria and most of eastern Europe. New Zealand and Hong Kong do not tax capital gains or losses at all. That comes back to the issue that underlies so much of our proceedings: the weight of taxation in this country versus that in other parts of the world with which we compete.

Question put and agreed to.

Clause 36 ordered to stand part of the Bill.

Nicholas Winterton: We now come to another chapter. May I advise the Committee that clause 37 introduces schedule 6? Following what we have just experienced, it might be appropriate to debate that schedule with clause 37, or to have a very brief debate, if necessary, on clause 37 and to have a longer debate on the schedule. I am in the Committee’s hands. I am inclined to reverse what we have just done, and to have the debate on the schedule.

Mark Field: Perhaps I might make a suggestion, Sir Nicholas? We are entering a new chapter, so all the rules that we have previously worked to go out of the window. Given that we will discuss two different groups of amendments on schedule 6, it might be more appropriate to have a stand part debate on schedule 6 after the amendments have been dealt with.

Nicholas Winterton: I am perfectly happy to accept that.

Clause 37 ordered to stand part of the Bill.

Schedule 6 - Accounting practice and related matters

Philip Hammond: I beg to move amendment No. 114, in schedule 6, page 84, line 35, after ‘company’, insert
‘(such accounts being prepared in accordance with generally accepted accounting practice).’.

Nicholas Winterton: With this it will be convenient to discuss amendment No. 115, in schedule 6, page 85, line 18, after ‘company’, insert
‘(such accounts being prepared in accordance with generally accepted accounting practice).’.

Philip Hammond: The amendments would confirm explicitly that the accounts referred to in the schedule must be prepared under United Kingdom generally accepted accounting practice. That would ensure that the schedule operates as intended and that the  operation of section 836A of the Taxes Act 1988 and section 50 of the Finance Act 2004 is imported into the paragraph. In respect of the application of accounting standards to securitisation companies, it is important that regard be had to section 83(1) of the Finance Act 2005 for the provision to work properly.
The Paymaster General wants to prevent leakage of tax from the system. I am sure that her officials are aware that people in the big, wide world who specialise in such matters are already looking at using companies when local company law requires them to use particular accounting treatments that give a result, which is convenient to them from a tax point of view. It is considered appropriate therefore for there to be an explicit reference to the accounts being prepared in accordance with generally accepted accounting procedure.

Dawn Primarolo: Before referring directly to the amendments, it would be helpful if I set certain matters in context as that would deal with the issues raised by the hon. Gentleman. The schedule will continue the work of adapting tax legislation to take account of the adoption by UK companies of international accounting standards and the new UK standards that follow the IAS closely, a point that will be important to bear in mind when I come to the amendments.
The schedule builds on the legislation that was included under the Finance Acts of 2005 and 2004. The IAS are developing all the time and, as companies are grappling with converting to those standards, it is not surprising that further tax issues keep emerging. To cope with the rapid change and to make sure that tax legislation keeps up with the demands of the growth economy and fast-changing competitiveness, the schedule continues the trend to include regulation-making powers to enable the Government to react quickly to changes and to consult about them outside the usual Finance Bill timetable. I have written to the Committee and have described the way in which we intend to use such powers. Reservations are always expressed about the use of regulations, but I hope that Opposition Members will accept that the use of regulations is necessary in a complex and evolving situation.
The schedule reacts also to representations about a late change made under the Finance Act 2005. The change was made to stop avoidance and to block unintended loopholes. However, some experts who are working closely with Her Majesty’s Revenue and Customs in such areas said that the change may inadvertently have gone too far. That returns to our earlier debate about how the Government try to strike a balance. Because the change may have gone too far, there was a possibility that it would inhibit some types of corporate rescue. The Government acted swiftly to relax the rule without destroying its original aim.
I mentioned the close working between HMRC and the experts. I pay tribute to those from business and the professions who engaged in the consultative groups that HMRC set up precisely to try to curb problems for both business and tax authorities in this  rapidly changing environment. In the consultation process, the groups were particularly helpful in contributing to the designing of regulations dealing with the most complex technical parts of the changes. Six regulations were laid in December last year, but they dealt with only part of the story. There has been a continuing process of refining the draft regulations, modifying and extending the December regulations, so that they can deal with a lot of new issues that are coming to light. That process is in hand and there is a very close working relationship.
Having set the scene to show how the Government have put in place a process to deal with changing circumstances, I come to amendments Nos. 114 and 115. I recognise that the intention behind the amendments is to be helpful, but I reassure the hon. Gentleman that they are unnecessary. They seek to ensure that where the legislation being amended under the schedule refers to the “carrying value” of a loan relationship in a company’s accounts, the accounts are those prepared in accordance with generally accepted accounting practice. However, it is highly unlikely that the accounts of a company would not be prepared in that way.
The hon. Gentleman touched on what might be the one exception; a company, based in another country, using that country’s accounting standards. The loan relationships legislation already provides that if a company does not draw up accounts in accordance with UK generally accepted accounting practice, for tax purposes it must be assumed that it has used the UK generally accepted accounting practice. So, the amendments are unnecessary because the Bill already copes through its interaction with loan relationships legislation; that addresses the point that the hon. Gentleman made.
Having put that clearly on the record, I hope that the hon. Gentleman accepts that on this occasion the Government are trying to work closely with business to respond to international accounting standards, the new UK standards, and the transition from one to the other.

Philip Hammond: I am grateful to the Paymaster General. It might be considered slightly optimistic to say that the schedule builds on the Finance Act 2005. In fact it corrects the defects in that Act, which necessarily went through the House at great speed; all stages were conducted in a single afternoon. That probably underpins the point that we have tried to make; there really is need for extensive consultation with business on these matters. The Paymaster General herself spoke of the benefit that such a consultative relationship can have.
The bottom line is that although it may be sometimes tempting to think that all people who plan corporate tax schemes are simply trying to do the Treasury down, the truth of the matter is that they are anxious to keep the line between permissible planning and unacceptable avoidance clear. Provided that the Government’s intentions are not grossly unreasonable, if they make their end target clear the industry and the specialists will rally round and try to  help them to devise legislation that is as narrowly focused on the Government target as possible. After all, it is in the industry’s interests to do so.
The problem, to which the Paymaster General alluded, is that because there is an emotion that we can perhaps only describe as paranoia surrounding this whole process, there is no pre-consultation. Announcements are sometimes made immediately prior to the Budget, with Budget day as the date when they come into effect. That results in everyone running to catch up, rather than quietly discussing the issues, assessing what the Government’s real policy objective is and helping the Inland Revenue and Treasury officials to draft effective legislation.

Rob Marris: Is the hon. Gentleman saying that the explanatory notes to schedule 6 are wrong? They state:
“A Working Group on the tax implications of IAS 39, composed of representatives of the professions, business and HM Revenue and Customs continues to meet. It is concentrating on two areas that have caused particular difficulty: the hedging of foreign currency risk, and the treatment of convertible and asset-linked securities.”
That seems to me to refer to consultation, and therefore directly contradicts what the hon. Gentleman has just said about a lack of consultation on these sorts of matters. Is he saying that that statement in the explanatory notes is incorrect?

Philip Hammond: In the context of the introduction of international financial reporting standards, there will be ongoing consultation with industry. I was making a more general point about hasty legislation and the temptation not to consult, which the Paymaster General referred to in her remarks on anti-avoidance legislation. The danger of that is that things might then be got wrong and have to be unwound later.
The Paymaster General also made some important points about the broader structure of schedule 6 and the regulations that will in due course be made under paragraphs 10 and 11. I anticipate that there will be a stand part debate, and it might be sensible for me to comment on the provision in general then. For now, I will confine my remarks to the two amendments. The Paymaster General has given a clear assurance that the concern that underlay those amendments is misplaced and that there are other legislative measures that will deal with it, and I am grateful to her for that. She has satisfied me that they are unnecessary. Therefore, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Philip Hammond: I beg to move amendment No. 113, in schedule 6, page 86, line 24, at end insert—
‘Spreading of adjustment on change of accounting policy 6A(1)In paragraph 19A of Schedule 9 to FA 1996 (loan relationships: adjustment on change of accounting policy), after sub-paragraph (5) insert— “(5A)Where there is a change of accounting policy in accordance with sub-paragraph (2)(a) above, then the company may in respect of its cumulative adjustments, elect that the adjustment shall be spread over six periods of account rather than being taxed in accordance with sub-paragraph (3) above. (5B)An election made in accordance with sub-paragraph (5A) must be made— (a)by notice in writing, 
6A(1)In paragraph 19A of Schedule 9 to FA 1996 (loan relationships: adjustment on change of accounting policy), after sub-paragraph (5) insert—
“(5A)Where there is a change of accounting policy in accordance with sub-paragraph (2)(a) above, then the company may in respect of its cumulative adjustments, elect that the adjustment shall be spread over six periods of account rather than being taxed in accordance with sub-paragraph (3) above.
(5B)An election made in accordance with sub-paragraph (5A) must be made—
(a)by notice in writing,
(b)to the Commissioners,
(c)within twelve months of the end of the first accounting period to which the new basis applies.
(5C)If an election is made, then, in each of the six periods of account beginning with the first period for which the company prepares accounts in accordance with international accounting standards, an amount equal to one-sixth of the amount of adjustment is treated as arising and chargeable to tax.”.’.
The amendment is a pragmatic measure that deals with two issues. When other major changes have been made in the basic computation of taxable profits—for example, the change from realisation basis to market in 2002, and the introduction of the loan relationship rules in 1996—facilities were made available so that the gain or loss arising from the introduction of the legislation and the change that was therefore taking place could be spread over six years in order to ensure that taxpayers were not hit in a single period with what was effectively a windfall tax. Also, the legislation and the statutory instruments are still being laid around the whole subject of the implementation of IFRS and its impact on taxable profit calculations. As the Paymaster General said, and the hon. Member for Wolverhampton, South-West emphasised, there is an ongoing consultation process on how the detail of that would work.
It is unreasonable to expect taxpayers to have to pay any windfall tax arising from the introduction to the Revenue in a single period. One concern is that the rather generous, or reasonable, treatment that has been offered when there have been earlier structural changes to the way in which taxation is calculated appears not to be on offer this time. Perhaps we on the Conservative Benches are puzzling over the Red Book prediction that corporation tax receipts will rise by 28 per cent. next year, compared to this year. Many who are engaged in business and industry spend some time puzzling over that, too. Perhaps the Government expect that there will be a one-off windfall benefit from these changes that it is seeking to capture, which is why they have not allowed a more generous spreading treatment for the one-off change that has been allowed in the past.

Rob Marris: The transitional aspects are difficult, but is not it the case, to quote explanatory note 35 to schedule C:
“In 2003 the DTI announced that the UK would take up an option in the”
European Union
Regulation to permit, but not require, all UK companies to use IAS to draw up their accounts, also from 2005.”
That is permissive but not mandatory, so surely it is a matter of whether a company finds one regime more favourable than the other and is not required to switch.

Philip Hammond: I might have to take advice from my hon. Friends on that. However, the point surely remains the same. The Government are committed to moving to international financial reporting standards. Surely it is appropriate for there to be a smoothing mechanism whenever any structural change is made. If the hon. Member for Wolverhampton, South-West  does not mind, I should like to hear what the Paymaster General has to say about this; whether there is a principled argument, on this occasion, against allowing the impact of the change to be spread over a period of time, or whether it is simple expediency from a revenue-gathering point of view.

Dawn Primarolo: Amendment No. 113 allows a company that adopts international accounting standards to elect to spread the transitional adjustment arising on the change of the accounting basis over an indeterminate period of between five and seven years. However, that only applies if the company does not exercise an election to international accounting standards to restate its previous year’s figures using UK generally accepted accounting procedures, or to its loan relationships, not its derivative contracts. It does not apply if the company changes one version of UK generally accepted accounting procedures to another.
I thought that the hon. Gentleman might say that amendment No. 111 was a probing amendment, so I should explain why it is not acceptable. I suspect that he knows, but I shall put it on the record anyway.
The change to international accounting standards throws up the possibility of big differences between the closing figures in a balance sheet using UK standards and the opening figures using international accounting standards. If nothing were done, those amounts, whether they were profits or losses, would all be effective for tax in 2005.
The businesses affected by that, particularly banks, asked for some form of alleviation from having to bring the amounts in at once. They pointed out that the figures were very large—an estimate of an extra £4 billion of losses on one issue for banks alone—and volatile. Some companies would be big winners and some would be big losers; some might net profits and some might have losses to be unaffected. As a result, we announced in December that most transitional adjustments would be deferred to 2006 pending detailed figures being available. When they are, the Government will decide how to proceed with the transitional adjustments.
The amendment, if passed, would at a stroke, subvert the policy. There is a potential for everything to happen that we are being told about—for very large losses and large profits swinging between different companies and businesses—and for a transition to be desirable. We need the figures in order to come to a sensible arrangement.

Philip Hammond: Will the Paymaster General give way?

Dawn Primarolo: I would like to finish the point. I will cover everything and, if necessary, the hon. Gentleman can come back in.
The amendment seeks to substitute that careful examination of the figures and their effects on companies with a lottery in which only those companies showing a net profit on their debt assets and liabilities when they first adopt the international  accounting standards can elect to spread the taxation of those profits, while those with losses on transition of their debt assets and liabilities, or those with transitional profits or losses arising in some different way, gain no greater degree of certainty. For example, adjustments on derivatives, which are not covered by the amendment, might run into hundreds of millions of pounds for some companies. That would not apply just for banks and other financial institutions, but also for oil companies, utilities and others that have derivatives embedded in purchase or supply contracts.
It has been virtually impossible for companies to predict the effect of the change on their balance sheets. Most of those companies that adopted the new standards on 1 January are still struggling to quantify the transitional profits or losses. Further regulations will be laid as soon as possible. They will set out how the transitional amounts, which have been temporarily deferred by the regulations, will be dealt with.
First, however, the Treasury and HMRC are endeavouring to obtain figures from the major companies on the size and direction of transitional adjustments in order to inform the policy. The hon. Gentleman is right to say that that is not new; where this type of situation has occurred, HMRC has a track record of negotiating with the companies to achieve a sensible transition.
I urge business to let their representative bodies have a decision as soon as possible. A decision will have to be made soon, and the more comprehensive the figures, the better the solution can be targeted to assist companies and to strike the right balance.
The amendment would allow companies to elect out of the regulations entirely, but it would be a one-way bet, because no company would elect to spread its losses under the amendment if they did not know what the revised regulations would say. The amendment covers only a narrow part of the issue. As I said, it does not deal with derivative contracts at all. It does not deal with the cases where the transitional adjustment arises as a prior period adjustment, whether under an international accounting standard or the new UK generally accepted accounting practice.
There are other drafting issues. The term “cumulative adjustments” is undefined and the spread proposed is over six periods of account—not six years, which is what I suspect was meant. Six periods of account could be longer than six years, especially if companies manipulated their periods to stretch out the transition. Furthermore, the language at the end of proposed new sub-paragraph (5C) is not suitable for the loan relationships legislation and makes little sense.
The amendment does not work; even if it did, it would not do so in an even-handed way on the differences in the accounts. The essential point is that when HMRC, having consulted with the representative bodies and the companies, is aware of the scale of the issue, discussion can take place about whether transitional arrangements are necessary—I tend to think that they will be—and about the time periods and the relevant arrangements.
That is a much better way to proceed. I hope that, given my assurances that that discussion will take place and that those arrangements will be made in a proper, balanced fashion with the information before us, the hon. Gentleman will not seek to press his amendment.

Philip Hammond: The best reassurance that the Paymaster General has given me is that she thinks that transitional arrangements “probably will be necessary”—I think that that was her phrase. Hopefully, that will give some comfort.
We are in a slightly strange situation. In the next three weeks, companies that adopted IFRS from 1 January make their first payments of tax under the IFRS standards. There is still the question of how the transitional sums will be dealt with. My understanding is that business would like to get this matter resolved.

Dawn Primarolo: I do not know where the hon. Gentleman gets his information, but the position of HMRC has been confirmed to me again. HMRC understands the point about transitional arrangements, is trying to meet companies on that and wants companies to tell it the scale of the problem. Then it will open up the discussion so that that can be properly decided on. That has been said repeatedly to companies. In the absence of the information from the companies, it is difficult to make the arrangements. For the companies to complain that it has not been done because they have not provided the information is simply not reasonable.

Philip Hammond: I am not sure whether I quite understood the Paymaster General’s point. I was trying to make the point that—if I understood her correctly—by changing their accounting standards, those transitional amounts will arise. Obviously, the companies themselves will not know what the tax treatment of those amounts will be. The Paymaster General is urging those companies to engage in discussions with the Revenue to present their arguments, I guess, for the most favourable transitional arrangements. That, I think, is what she is suggesting. I do not have any evidence, but perhaps I can infer from what she says that companies are not engaging in that process. I thought that she said earlier that they were, and that the consultation process was going well.

Dawn Primarolo: Will the hon. Gentleman give way?

Philip Hammond: I shall, although the Paymaster General does not always offer me the same courtesy.

Hon. Members: Oh!

Dawn Primarolo: The heat has not even risen yet; and the hon. Gentleman complained about barbed comments in our last sitting.

Philip Hammond: No, that was you.

Nicholas Winterton: Order. This has been a measured and constructive debate, and I hope that it can continue that way.

Dawn Primarolo: Discussion is going on with business. Business has been informed by HMRC that to progress the discussion on transitional arrangements the figures are required. HMRC is awaiting those figures. The hon. Gentleman said that businesses had wanted him to press the Minister in Committee to get the matter settled now. I was saying that the essential ingredient needed to finalise the matter was the information, which should be forthcoming from business. We are awaiting that information so that we can engage in a discussion on transition.

Philip Hammond: I do not think that we disagree on anything. I said—and I have not heard the Paymaster General disagree with the view—that I was sure that business would rather have the issue clarified sooner than later. She said that to get it clarified sooner we would need the information. I then said that I was not aware that there was a problem with the flow of information, because she had previously told the Committee that the consultation process was ongoing and working well. However, I infer from what she says that we are at a point now—let us call it a point—where that consultation is not stalled, perhaps, but is awaiting input from the companies concerned before the Treasury or the Revenue can make suggestions for a transitional regime.
Under the amendment, we have put down one option for a transitional regime. We have not sought to suggest that it is a perfect solution. The Paymaster General thought that I might have moved it as a probing amendment, whatever that means, but we did not draft it thinking that it was perfect in every respect and covered every aspect. But I guess I am somewhat reassured by the Minister saying that there will be a transitional regime. I hope that it will allow the spreading of any tax consequences over a longish period, as past changes have done, because companies that made the change without knowing what the tax treatment of the transitional amounts would be have taken a leap of faith. They have taken a leap in the dark, although in some cases they have not had a great deal of choice about it. They are dependent on the Treasury and the Revenue concluding on a sensible regime.
I guess—I do not know—that there is a contingent tax liability that such companies have to carry until the matter is clarified and the details of regulations for the transitional period are made available. I hope that the tax treatment will then become clear and that it will be spread in a way that does not create shocks for companies in the market; and I hope that it will not produce post-tax situations that are substantially worse than expected for any company or significant group of companies.

Rob Marris: May I caution the hon. Gentleman? The Paymaster General said that negotiations were going on. To use a timely analogy, the tennis ball is in the companies’ court, from what she has said. Is the hon. Gentleman not worried that, if amendment No. 113 were passed, the companies—his friends in the  City—could get a worse deal than the one that they might end up negotiating with the Treasury? The amendment might not do them any favours at all.

Philip Hammond: I hope that the people we are talking about are friends of us all; they create the wealth on which our public services and the prosperity of our people depend. It is not usually his style, but if the hon. Gentleman wants to play class warfare and try to provoke me into talking about his friends in the trade unions for whom he used to work and from whom, in his previous firm, he derived the large fees that he told the Committee about last week, I have to say that that is not a helpful way in which to proceed.
We are talking about some of the largest companies in the UK economy, the health of which is important to all of us. They, in turn, pay dividends after tax, which support all sorts of enterprises, such as private investors and collective investment funds. It must be important to us all that the system is treated properly and I am sure that the Paymaster General fully intends to ensure that that is the case. Despite our slightly ill-tempered exchange, I perceive no point of difference between us except that we want to define in advance how the transitional amounts will be handled, whereas she prefers to engage in a consultation process, which apparently has now been held up because information is awaited from the corporate side, but which will determine later how the amounts are to be dealt with. The hon. Member for Wolverhampton, South-West reinforced the Paymaster General’s argument that, as drafted, the amendment would not deal effectively with the loan relationships and the gains on derivatives, but I do not think that the right hon. Lady and I are millions of miles away from each other.

Rob Marris: The hon. Gentleman suggested that I am not a friend of business. I was not raising the issue from one angle or the other. I merely pointed out a way that could be business friendly. To use the vernacular, the deal that the hon. Gentleman wants to put on the table with amendment No. 113 might be a worse option for business than the deal that might be available from the Treasury, which is currently under discussion.

Philip Hammond: Or not currently under discussion, given what the Paymaster General said. The hon. Gentleman might be right in that the right hon. Lady has pointed out the defect in the amendment. I accept that.
One of the themes to which we have returned continually during our debates is that the markets values certainty highly. As long as the transitional treatment is unclear, some element of uncertainty will be created and it will be helpful to remove that as soon as possible. I am sure that the Paymaster General is right to say that the ball is in business’s court. It was not clear that those to whom I have spoken regard themselves as holding the ball and holding up the process until they pass information back to the Revenue, but I shall take what the right hon. Lady said at face value. If people consider that there is an issue  to be raised in response to her point, I am sure that it will come up in due course and we can return to the matter. For the moment, having aired the issues and heard the Paymaster General’s response, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Question proposed, That this schedule be the Sixth schedule to the Bill.

Rob Marris: I wonder whether the Paymaster General could, either now or by letter, explain paragraph 25 of the explanatory notes on schedule 6, which states:
“a company in a period of account beginning on or after 1 January 2005 is not permitted to adopt bifurcation treatment in its accounts for loan relationship assets containing embedded derivates (“relevant assets”) because it still uses “old UK GAAP”, it can elect for section 94A(1) to apply.”
That is supposed to be an explanatory note, but I struggle with it, so I ask for clarification. .

Mark Francois: May I tell the hon. Gentleman that it is disconcerting for the whole Committee to hear his admission that he does not understand a key paragraph of the explanatory notes? Several of us thought that he wrote them. I am extremely alarmed and I wish to place that on the record before the Paymaster General replies to that unexpected inquiry.

Rob Marris: Had I written the explanatory notes, I would have been moonlighting—and I do not approve of that—and I would have understood them completely. I mentioned one note, which I think is relatively minor, that I did not understand and I was hoping for an explanation. Apart from that one, the explanatory notes have been extremely helpful.

Stephen Hammond: I wish to raise a point that was highlighted by the Chartered Institute of Taxation. I am sure that the Paymaster General is aware of it, but I hope that today she will give the Committee clarity on it. It deals with a problem that has arisen in relation to paragraph 5 of schedule 6, which deals with schedule 9 of the Finance Act 1996, where, in accordance with either international accounting standard 39 or financial reporting standard 26, a company uses a derivative contract as a fair value hedge of a loan that it has made.
A fair value hedge will arise where the company has lent money on fixed-rate terms and then entered into an interest rate swap to change the fixed-rate return on the loan for a floating-rate return. It seems to me, and to the Chartered Institute of Taxation, that the schedule, as drafted, would prevent companies from being able to use a derivative contract as a fair value hedge of a creditor loan. That is because when they account for it on an amortised cost basis or an accruals basis—I think that amortised cost is the new version of the accruals basis—they will be denied relief for any fall in the value of that loan.
Will the Paymaster General clarify that where a lender uses a derivative contract to hedge a fixed-rate loan, and the contract and loan are together designated as a fair value hedge for accounting purposes under either IAS 39 or FRS 26, the company will not be prevented from obtaining relief for debits arising on the loan relationship as a result of the revaluations attributable to the hedging relationship?

Brooks Newmark: In commenting on the schedule, specifically on the Government’s intention to bring forward regulations to establish a permanent tax regime for securitisation specific purpose vehicles, I wish to reiterate a number of points.
First and foremost, all of us accept the need to balance casting the net of anti-avoidance legislation wide enough to prevent circumvention and maintaining a tax regime that does not prevent foreign investment, which would damage UK competitiveness. Secondly, we must be careful of unintended consequences, which is a theme that we have discussed throughout this Committee. We must avoid damaging jobs in the financial services and manufacturing sectors and ultimately losing the tax benefits that would accrue to the Exchequer. My third point is about the level of uncertainty, which was addressed by my hon. Friend the Member for Runnymede and Weybridge. The lack of clarity in the wording of the Bill, and specifically in the schedule, still risks putting off foreign investment in the UK and driving businesses into more favourable tax regimes.
None the less, I welcome the efforts the Government have made in respect of the schedule—specifically the fact that the Inland Revenue has listened to the securitisation industry and introduced appropriate changes to UK GAAP moratoriums for those companies with that profile. I also welcome that the Government intend to introduce regulations to establish a permanent tax regime for the securitisation SPVs. However, in a similar vein to my earlier argument with respect to real estate investment trusts, I urge the Government to accelerate the decision-making process to ensure certainty, not only because these vehicles will often be used for long-term borrowings, but because, as the Paymaster General said, we want to create in Britain a modern and competitive tax regime.

Dawn Primarolo: I look forward with some enthusiasm to our discussions on clause 59 and schedule 7, because at that point I will be able to demonstrate how difficult it is for a Government to strike a balance on the anti-avoidance of tax by ensuring that measures are appropriately targeted and err on the side of the taxpayer, and I will also be able to describe the problems that can subsequently arise. I hope that when the arguments come back the other way, the hon. Gentlemen will not object because they will be able to see clearly what is going on. They will be able to reflect on whether all the comments they made today still hold true because of the behaviours of others, notwithstanding the good intentions underlying the speeches made in this Committee.
The hon. Member for Braintree has again made a point that is, rightly, repeatedly returned to in these debates: the importance of dealing with avoidance. I have to say to the hon. Gentleman, however, that certainty is not a one-way street. It is not just business that needs certainty from the tax system. Certainty is needed for taxpayers and for the Exchequer—the tax authorities should be able to make reasonable assumptions. That is the balance that we are seeking to strike.
It has not always been the view of Conservative Members of Finance Bill Committees—I will be able to provide illustrations of this point later—that  aggressive avoidance where there is no question of commercial purposes should be dealt with. I mistakenly assumed that that previously expressed point of view would continue. I accept the statement made by the hon. Member for Runnymede and Weybridge that he is not seeking to defend avoidance. However, I say to the hon. Member for Braintree that avoidance works against fair tax competition if it distorts investment decisions. He knows that full well from his own experience.

It being One o’clock, The Chairman adjourned the Committee without Question put, pursuant to the Standing Order.
Adjourned till this day at half-past Four o’clock.